The Butterfly Effect

There is an expression: "You cannot change just one thing.” This aphorism makes logical sense, particularly with regard to change orders in a construction project. The burden on a contractor, when faced with a change of any magnitude, is to anticipate direct and indirect effects of that change on all parts of the work and then compute the cost and time impact.

Usually, an astute owner will not allow you to insert a “savings” proviso in the written change order to the effect that “the contractor reserves the right to claim impact costs” or similar language. Often, the change order form will go further and state the modification is for “all costs and time associated with the change.” This language is meant to close the contract modification, and it normally accomplishes that goal.

There are extraordinary circumstances when residual costs are not fully derailed by a change order. For these situations, metaphors have come into use, such as “ripple effects” or “impacts.” These words attempt to denote unexpected side effects of a known change. Among the more difficult to prove are the effects of changes on unchanged work.

In federal government contracting, the standard changes clause recognizes this concept. The same cannot be said with certainty with state law. Under the Federal Acquisition Regulations (FAR), FAR P 52.243-4, the following language appears: “If any change under this clause causes an increase or decrease in the Contractor’s cost of, or time required for, the performance of any part of the work under the contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing.” (Note: Emphasis added)

The good and the bad

Under discussion here are “changes,” not claims events generally. With the above clause in your contract, you can request time and money for unchanged work. For example, if a change makes the performance of unchanged work more difficult, delays the completion of other work or disrupts the planned performance in some other way, relief is available to the contractor.

On the other hand, you are cautioned to investigate these side effects. At least superficially, the FAR seems to require that all related costs be disclosed at the time the “change under this changes clause” is being negotiated. How can you be sure that you have covered all related costs, aside from using your past experience and your intuition? And what happens if you miss some of the costly side effects?

A good example of the application of this FAR is the recent case of Bell BCI Co. v. United States, 2008, U.S. Claims LEXIS 116 (Ct. Fed. Cl. 2008). In Bell, the court was confronted with delays and disruptions, acceleration and cumulative impacts of changes. On top of this stew was a type of waiver language (the government argued accord and satisfaction) in the individual signed change orders.

They did what?

The National Institutes of Health (NIH) signed a fixed-price contract with Bell for a five-story building plus basement. According to the court, NIH discovered that it had a budget surplus and decided to add a sixth floor with the unexpected funds. This decision was made nine months into a two-plus year project.

From this point, the court’s opinion in Bell made numerous references to numbers: more than 200 contract modifications; more than 700 extra work orders; project completion was delayed by 19½ months (originally about 27 months); five stories to six; a 34 percent increase in price from approved change orders. Making matters worse, the contract modifications, all signed by Bell, contained the following language:

“The Modification agreed to herein is a fair and equitable adjustment for the Contractor’s direct and indirect costs. This Modification provides full compensation for the changed work ... . The Contractor hereby releases the Government for any and all liability ... for further equitable adjustment attributable to the Modification.”

Bell’s approach to the claims

Had NIH stopped issuing changes after it added the sixth floor, Bell’s claims statutes would have been weak. However, more than 216 extra work orders were issued after that major design change. While none of these changes were major, the changes all had time effects on an already compressed schedule. NIH refused to grant more time extensions, leading to Bell’s argument of acceleration.

NIH wanted to treat the date of the addition of the sixth floor as the beginning of a new contract. In that way, Bell would be held to its bargain as contained in the change order, and additional claims would be limited to subsequent changes only. As those changes were, for the most part, signed off, the claims would disappear. Given the “full compensation” language of the change orders, NIH’s argument was not unreasonable. What Bell needed to do first was get around the change order language.

It was proven that none of the change orders, including the one adding the sixth floor, expressly included impact costs. The court ruled that “the absence of any explicit language releasing the cumulative impact claim [and] the absence of any consideration ... to settle the cumulative impact claim” meant those claims remained viable. If there were any ambiguity in what the change orders covered, the risk of that ambiguity was on NIH. This finding by the court may not, in future cases, be taken at face value.

Now the door was reopened for Bell to claim loss of labor productivity. The method used by Bell is worth paying close attention: “Bell’s practice for many years has been to track productivity rates by requiring the foremen to record each week the amounts of units installed on a project, allowing Bell to compare the actual time to install units against its estimates ... .”

This productivity documentation method can be a powerful tool. For electrical contractors, for example, you can track the number of feet of conduit installed, number of terminations, number of light fixtures hung, etc. It can appear to be a rather gross measurement, but it also is a simple tabulation that can then be overlaid onto your schedule, a manpower plot, or even a percent complete plot. In Bell, the units’ tabulations provided the court with a mathematical basis for awarding the labor cost of lost productivity.

By allowing the productivity factor in Bell to be applied to all labor, the court permitted recovery of extra labor on both changed and unchanged work. As a practical matter, there was no way to distinguish labor absorption on this job.

Seemingly airtight waiver clauses can be overcome. You must look very carefully at the language used in your change orders and keep good records to support any claims.

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, or

About the Author

Gerard W. Ittig

Legal Columnist
Gerard Ittig, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, or .

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